1
HE311 Cost-Benefit Analysis
Term Paper
AY2013/2014 Semester 2
Topic
Cost-Benefit Analysis on Sin Tax
Name Matriculation Number
Alan Dai Sheng U1030562D
Lee Liang Tian U1030042J
Lee Yee Jia Jamie U1030852A
Ong Soo Yue U1030677L
Wong Li Ting U1030590D
Yap Hon Looi Jensen U1030257G
2
SECTION 1: INTRODUCTION 1 SECTION 2: TOBACCO - INDIVIDUAL COSTS AND BENEFITS 3 2.1 ADDICTED SMOKERS 3 2.2 NON-ADDICTED/POTENTIAL SMOKERS 3 2.3 COSTS 4 2.3.1 DISUTILITY & DISSATISFACTION 4 2.3.2 LOSS OF ENJOYMENT 6 2.3.3 LOSS OF SOCIAL OPPORTUNITIES 6 2.3 BENEFITS 7 2.3.1 PERSONAL SAVINGS 7 2.3.2 REDUCED HEALTH RISK 7 SECTION 3: LIQUOR INDIVIDUAL COSTS AND BENEFITS 10 3.1 COSTS 10 3.1.1 LOSS OF CONSUMER SATISFACTION 10 3.1.2 PARTIAL LOSS OF HEALTH BENEFITS 12 3.2 BENEFITS 13 3.2.1 INCREASE PRODUCTIVITY 13 3.2.2 PERSONAL SAVING 14 3.2.3 HEALTH BENEFITS 14 SECTION 4: SOCIAL COSTS 16 4.1 MARKET INEFFICIENCY 16 4.2 REDUCTION IN TOTAL SURPLUS 17 4.3 THE CIGARETTE BLACK MARKET 17 4.4 INCOME DISPARITY 19
3
SECTION 5: SOCIAL BENEFIT 20 5.1 ADDITIONAL TAX REVENUE 20 5.2 DETERRENCE OF NEW ENTRANTS 21 5.3 SAVING ON PRODUCTIVITY LOSS 22 5.4 FEWER EXTERNALITIES 23 5.4.1 FEWER TRAFFIC ACCIDENTS 23 5.4.2 LESSER AIR POLLUTION 25 5.5 REDUCTION OF EMOTION DISTRESS 25 6. CONCLUSION 26 APPENDIX: INDIVIDUAL CONTRIBUTIONS 29 BIBLIOGRAPHY 31
1
SECTION 1:
INTRODUCTION
On 21 February 2014, Singapore Government announced its Budget statement
for 2014. The statement introduced a so-called sin tax increase on tobacco and
alcohol (Chang, 2014). The excise duties for cigarettes and other tobacco products
were raised with immediate effect by 10% and for all liquor products, 25%.
Combined, the increases in the sin tax are to yield additional revenue of
approximately 200 million for the government. (Ministry of Finance, 2014)
According to Deputy Prime minister Tharman Shanmugaratnam, the objective
of such increases is to discourage excessive consumption of both products (Channel
News Asia, 2014). It has been almost a decade since the last increase. The previous
increase in tobacco duties was introduced in 2005, while the excise duties on liquor
products have remained constant (Ministry of Finance, 2014).
During the past decade from 2006 to 2012, alcoholic beverage and tobacco
consumption has seen has been growing at a rate of 5.66% annually at 2005 constant
price, outpacing the annual total population growth rate of 3.19% (Department of
Statistics, Singapore, 2013). The per capita consumption of tobacco and alcohol
products has certainly gone up. On the other hand, the growth in consumption has
led to 33.15% more jobs, equivalent to an annual increase of 4.89%, in the related
industry during the same time period (Department of Statistics, Singapore, 2013).
The percentage of smoking population in Singapore has seen an upward trend,
starting from 12.6% in 2004, to 14.3% in 2010, and eventually reaching 16% in 2012
(Abraham, 2012). Among those who smoke, 4.5% are reported to be addicted. Over
35% of the smoking addicts are between 18 and 35 years old (Ministry of Health,
2
2012). Alcohol consumption is of a different nature because non-excessive drinking
might bring net benefit. Nonetheless, as reported by World Health Organization,
1.59% of the Singapores population suffered from alcohol use disorder in 2006.
Besides, among every 100,000 people, 4.4 cases of liver cirrhosis, a recognized
consequence of excessive drinking, are reported (World Health Organisation, 2011).
The imposition of higher excise duties is expected to reduce the consumption of
both demerit goods. However, the impact of higher taxes goes beyond the reduction
of health risks among individuals and extends to other socioeconomic aspects.
Leveraging the tool of cost-benefit analysis, this report aims to provide a
comprehensive albeit preliminary view of how the increase in excise duties for
tobacco and alcohol affect various aspects of the economy. For the purpose of
discussion, the report begins with individual cost-benefit analyses of tobacco and
liquor tax respectively, before diving into social costs and benefits of the sin tax
increase as a whole.
3
SECTION 2:
TOBACCO - INDIVIDUAL COSTS AND BENEFITS
The recent Budget 2014 has announced a 10% increase in tax for tobacco
product, which is aimed to reduce the prevalence of smoking among Singaporeans.
This section presents a cost-benefit analysis of the tobacco tax increase from an
individuals perspective. For the purpose of the analysis, smokers are classified into
two categories, namely (i) addicted smokers and (ii) non-addicted smokers.
2.1 ADDICTED SMOKERS
Addicted smokers are defined as those highly addicted to the habit of smoking
and certainly have the expenditure on cigarettes integrated in their consumption
decision model. Their demand for cigarettes is presumed to be highly inelastic.
Therefore, a 10% increase in tax, equivalent to a price increase of $0.7 to $1.1 per
pack of cigarettes, is unlikely to alter their consumption pattern. This suggests that
the tax policy is ineffective in deterring the smoking habits of this group. In other
words, this tax policy is predicted to only result in additional costs to this group,
without generating remarkable benefits.
2.2 NON-ADDICTED/POTENTIAL SMOKERS
Non-addicted smokers include those who smoke socially and lightly, those who
just started to smoke, and those who might start to smoke in the near future. Young
adults account for the majority of this category, with a certain percentage being
students and other low-income demographic groups. They are yet addicted, which
allows them to refrain from smoking rather easily. For those with relatively low
4
income, the increase in tax further move them up their elastic demand curves,
prompting them to discontinue the habit.
2.3 COSTS
2.3.1 DISUTILITY & DISSATISFACTION
According to National Health Survey 2010, the mean number of cigarettes
consumed by an addicted smoker is 12 cigarettes per day. With the tax increase, the
price of cigarette per stick is expected to increase by 3.6 cents (Ministry of Finance,
2014). It is calculated that the estimated increment in a regular smokers expenditure
per month is 12.96 dollars.
Estimated total increment in individual expenditure on cigarettes per month
= 12 x $0.036 x 30 = $12.96
As shown in Figure 2.1 below, the demand curve has a steep slope due to the
highly inelastic demand of regular smokers. Thus, when a tax is imposed, price has a
noticeable jump from P1 to P2, while the decrease in the number of cigarettes
consumed daily is relatively smaller in scale. This effect is most pronounced in the
short-term, where the demand is virtually close to perfectly inelastic. In such an
extreme case, there is only jump in price with no reduction in quantity consumed.
Therefore, for an addicted smoker, an increment in the expenditure on cigarettes is
certainly taking place and cannot be easily avoided without a change in his
consumption pattern.
5
FIGURE 2.1 HIGHLY INELASTIC DEMAND (ADDICTED SMOKER)
Figure 2.2 illustrates the impact of the tax on an addicted smoker with perfectly
inelastic demand. The shaded area represents the decrease in consumer surplus,
which is equivalent to the increment in the consumers expenditure in this case, at
$12.96. In reality, with imperfectly inelastic demand, the actual loss in consumer
surplus is slightly smaller than $12.96. However, the deviation is expected to be
little.
FIGURE 2.2 PERFECTLY INELASTIC DEMAND (ADDICTED SMOKER)
6
Consumer surplus could be defined as the satisfaction or utility consumers
receive for which they dont have to pay for. Therefore, the reduction in consumer
surplus suggests a corresponding decrease in the satisfaction or utility level of
addicted smokers.
2.3.2 LOSS OF ENJOYMENT
Smoking is an enjoyable activity to most smokers, addicted or non-addicted. It
can help one relax and relieve from tension. However, smoking has negative and
widely recognized impacts on health.
It is assumed that an individual smoker, as a rational consumer, weighs both the
individual cost and benefit before buying a pack of cigarettes. As illustrated in the
equation below, the value of this enjoyment is indicated by the willingness to pay
for such a habit, which equals to the sum of the price of cigarette and the health-
related risk one is willing to take when smoking. For social smokers who do not to
smoke daily, they probably aware of the risk of prolonged smoking, so their
willingness to undertake health risk is small. As a result, the cost for them to forgo
this enjoyment of smoking is small.
Total value of smoking = Willingness to pay for smoking
= Price of cigarettes
+ Health risks
2.3.3 LOSS OF SOCIAL OPPORTUNITIES
Another reasons that people start smoking is that they can integrate better into a
social circle, or they use it as an opportunity to carry out social interaction. In some
circumstances, smoking is a stepping-stone for one to join a particular social circle.
7
Not smoking might seem as an unfriendly gesture to the smoking peers, alienating
oneself from them, and thus hindering integration. The value of this cost is hard to
determine and it varies on an individual basis. Some will find this cost substantial in
a business social context and some are just going to lose some smoking friends.
2.3 BENEFITS
2.3.1 PERSONAL SAVINGS
Smoking is an expensive activity as it can cost hundreds of dollars monthly if
addicted. A regular smoker consumes approximately 18 packs of cigarettes a month
with the current price ranging at $9.00 to $12.00 per pack. The expense is between
$162 and $216 per month. For social/potential smokers, the consumption is lower
but the rate of consumption can increase exponentially when the addiction is built.
In the long run, not smoking is able to save quite a significant amount of money.
We estimate the expenditure on cigarettes in a 10-year horizon. Assume ceteris
paribus and take average annual inflation rate over the past 10 years (approximately
2%):
Annual expenditure of cigarette would be $ !"#!!"#! 12 = 2,268 = $",!"#!.!"! =!!!! $20,780
2.3.2 REDUCED HEALTH RISK
Long-term smoking is a major cause for health problems such as cancer, heart
disease, stroke and Chronic Obstructive Pulmonary Disease (COPD). According to
8
Singapore Chinese Health Study, smokers generally have greater Hazard Ratio (HR)
in these diseases. Besides, the report has also proven that the prevalence of stroke
and cancer is higher among smokers (Sin How, Bee Choo et al. 2013). Most notable
disease among smokers is lung cancer. Study shows that probability of getting lung
cancer with smoking is 3.4% which is much higher than non-smokers 0.35%
(Wong, Seow et al. 2010).
TABLE 2.1. ADMISSIONS FOR LUNG CANCER (EXCL. SURGERIES)
Ward Type Hospital Volume Average Length of Stay (days)
50th percentile Bill ($)
90th percentile Bill ($)
A SGH 52 3.3 4498 10093
Private (2 Bedded)
MEH 40 1.4 5587 20494
Private (4 Bedded)
MEH 40 1.7 4268 12099
B2 NUH 64 6.8 2074 3993
SGH 217 3.8 1201 2697
TTSH 114 2.6 621 2808
C NUH 76 6.3 1268 2930
SGH 122 4.8 898 2058
TTSH 72 8.1 1209 2675
Day Surgery (Private)
MEH 50 1 3945 5030
Source: Ministry of Health
Total costs of treatments such as radiotherapy, chemotherapy, drugs and etc. is
difficult to gauge, as it depends on the combinations of treatments that each patient
requires. Plus, advancement in medical technologies further complicates the true
estimation for the treatment cost. In general, treatment cost can be amount up to tens
of thousands depending on individual condition in a month. In United States, the
average monthly total cost of lung cancer for patient of a standardized age of 72
9
(with treatment) is about USD 16,000 in the year of 2000 (Cipriano, Romanus et al.
2011). According to this information, we roughly estimate that average monthly
total cost for lung cancer in Singapore in 2014: US$ 16,000 * (1.02)13 = US$
20,678, with an error term subjected to country differences and medical
advancement. Not smoking is able to reduce the risk of getting these diseases and
hence avoiding the hefty medical bill.
10
SECTION 3:
LIQUOR INDIVIDUAL COSTS AND BENEFITS
3.1 COSTS
3.1.1 LOSS OF CONSUMER SATISFACTION
Alcohol is widely known for its muscle relaxing and anxiety reducing effects.
This is due to the depression of the central nervous system resulting in slower
communication to the brain. Also, drinking alcohol releases feel-good chemicals into
the area of the human brain otherwise known as the pleasure center. This rush of
chemicals leads to great surges of satisfaction and happiness (The Indian Express,
2012). With the tax hike, this avenue of stress reduction and happiness will result in
a likely loss in consumer satisfaction. Also, this tax hike is implemented at the
expense of leisure attained from alcohol consumption.
Furthermore, a survey carried out in a Northeastern liberal arts college in the US
concluded that students who were engaged in binge drinking were reportedly happier
than their non-binge drinking counterparts. This form of happiness derived from
binge drinking was also associated with an elevated perception of social status
amongst peers (Szalavitz, 2012).
At the individual level, this loss in consumer satisfaction can be directly
assumed to be the price increase in alcohol. For instance, before the tax hike, an
individual is willing to pay $10 for a round of drinks at a bar. After the tax hike, the
individual has to pay $10 (1 + Y) for the same round of drinks, where Y is the
increase in alcohol costs due to tax hike. Assuming this individual decides to cap his
expenditure at $10, he would be lowering his consumer satisfaction by Y%. Hence,
11
the value of consumer satisfaction lost can be assumed to be the elevation in alcohol
costs due to the tax hike, because the minimum amount of money this individual
requires is $10Y to bring him up to at least the original level of satisfaction.
A United Nations Socioeconomic survey was conducted from 1990 to 2006.
From the data, the latest observation on local alcohol consumption in 2006 was 2.6
liters of pure alcohol per capita.
Excise tax as a per cent of total retail price for 1 liter of pure alcohol = 2.1%
Total value of excise tax = $70.00 per liter of pure alcohol
Total retail price for 1 liter of pure alcohol: (70/2.1) X 100 = $3,333
Based on the above illustration and the latest observation of local alcohol
consumption of 2.6 liters of pure alcohol in 2006, as well as the retail price for 1 liter
of pure alcohol, the value of consumer satisfaction lost on average per capita is (0.25
* 2.6 * 3,333) = $2,166. Present Value equals to 2166 * (1.032)6 = $2,700
The following table shows the increase in price of alcohol due to the tax hike.
Source: Ministry of Finance, ST Graphics
12
3.1.2 PARTIAL LOSS OF HEALTH BENEFITS
A reduction in alcohol consumption may also lead to a fall in health benefits.
Moderate amounts of alcohol raise levels of high-density lipoprotein (HDL, or
good cholesterol), and higher HDL levels are associated with greater protection
against heart disease. Moderate alcohol consumption has also been linked with
beneficial changes ranging from better sensitivity to insulin to improvements in
factors that influence blood clotting. Such changes would tend to prevent the
formation of small blood clots that can block arteries in the heart, neck, and brain,
the ultimate cause of many heart attacks and the most common kind of stroke
(Harvard School of Public Health, 2014).
Based on a health study compiled by Professor David J. Hanson from 1997 to
2013, moderate drinking is categorized by an average of 3.55 liters of pure alcohol in
a year. Studies have shown that moderate drinking leads to 29% reduction in
cardiovascular diseases and 37% reduction in coronary heart diseases. It contributes
to 33% to 56% lower incidence of risk of diabetes and also 34% to 55% lowered
incidence of diabetic-related coronary heart diseases. This reduction in risks for the
several diseases is expected to result in approximately 2 years of additional life
expectancy.
As mentioned earlier, the average consumption of pure alcohol per capita is
around 2.6 liters, lower than the level of moderate drinking recommended. Thus, the
tax levied leads to an even lower consumption of alcohol among those who dont
drink excessively. For every person that used to drink occasionally but discouraged
by the tax increase, his statistical life expectancy is shortened by 2 years. With the
statistical value of a human life being $1.45 million and Singapores average life
13
expectancy being 82 years, it is calculated that the cost of health benefit per capita is
1.45 million * 2 years / 82 years = $35365.85 (Quah, Wai-Mun, & Ying, 2009).
3.2 BENEFITS
3.2.1 INCREASE PRODUCTIVITY
It has also been estimated that productivity loss is the main social cost of
harmful drinking (Collins & Lapsley, 2008; Rehm et al., 2006; Saar, 2009), costing
the U.S. $134 billion in 2008 (Harwood, 2010). Absenteeism and poor job
performance often led to accidents and injuries. The following calculation illustrates
the saving in productivity loss, resulted from a decrease in alcohol consumption
among binge drinkers in Singapore.
Average Price Elasticity of demand for alcohol in developed countries: -0.38
Percentage of binge drinkers in US: 20% of total population = 62.78 million
Percentage of binge drinkers in Singapore before tax hike: 12.6% of total population
= 0.68 million
Tax hike of 25% ! Increase in retail price of alcohol beverages by approximately 24%
Increase retail price by 24% ! demand falls by (24 * 0.38) = 9.12%
Estimated decrease of binge drinkers in Singapore due to tax hike: 0.062 million
Estimated savings in productivity loss in Singapore: (0.062m/62.78m) * 134billion X
1.26 SGD/USD = $0.166 billion
Estimated savings in productivity loss in Singapore per capita: 0.174b/5.3m = $31.47
Present Value: 31.47 * (1.032)4 = $35.70
14
Former binge drinkers in Singapore are expected to be more productive at work and
contribute an additional value of approximately $31.47 to the firms output.
3.2.2 PERSONAL SAVING
A United Nations Socioeconomic survey conducted from 1990 to 2006. From
the data, the latest observation on alcohol consumption in 2006 was 2.6 liters of pure
alcohol per capita.
Since the estimated price elasticity of demand is -0.38, a tax hike of 25% will
lead to a decrease in consumption of alcohol by 9.5%. This will lead to an estimated
0.247-liter reduction in pure alcohol consumption.
Excise tax as a per cent of total retail price for 1 liter of pure alcohol = 2.1%
Total value of excise tax = $70.00 per liter of pure alcohol
Total retail price for 1 liter of pure alcohol: (70/2.1) * 100 = $3,333
Total estimated economic savings per capita: 3,333 * 0.247 = $823.33
Present Value: 823.33 * (1.032)6 = $994.61
3.2.3 HEALTH BENEFITS
When sin taxes are high, it deters the consumption of alcohol among those who
drink excessively. It would indirectly lead to more health benefits as well
(Chaloupka, Grossman, & Saffer, 2002).
Some examples of health benefits include less mortality from liver cirrhosis,
cardiovascular diseases, sexually transmitted diseases and even depression. In fact, in
a study conducted, using data from 1961 to 1984, Grossman estimated that a 10 per
cent increase in tax rates would reduce cirrhosis mortality by 8.3 to 12.8 per cent in
15
the long run (Grossman, 1998). In 2013, OECD also released a new Health Working
Paper, which concludes that using taxes on alcohol to attain public health objectives
are effective (OECD, 2013).
Thus, in this case, we can establish that having a higher alcohol would raise
health benefits for those with excessive drinking habits in Singapore. We calculate
this increase in health benefit by Grossmans estimate. Using the average values, we
find that a 25 per cent increase in Singapores alcohol tax would lead to an estimated
26.38 per cent decrease in cirrhosis mortality.
16
SECTION 4:
SOCIAL COSTS
4.1 MARKET INEFFICIENCY
Rising rents, together with foreign labor restrictions, have already pushed up
operating costs of businesses, especially Small and Medium Enterprises (SMEs)
across Singapore. The tax hike is likely to deliver a further and direct blow to bars,
clubs and coffee shops, where the sales of cigarettes and liquor products constitute a
substantial proportion of the revenue. Inevitably, profit margins will be slashed in
accordance with the increase in vice taxes, as costs have increased but sales are
forecasted to plummet.
Endowed with greater bargaining power and economies of scale, large firms are
more likely to cope better with the increased tax burden. In theory, those with greater
flexibility in their cost structures could absorb higher proportion of the tax compared
to their competitors. This could effectively provide these companies with the option
to undercut their competitors for the purpose of boosting sales and increasing market
share. Such an option could serve as a temporary competitive advantage to phase out
the weaker and usually smaller firms. In other words, Small and Medium Enterprises
(SMEs) are likely to be the losers in this situation, which can be detrimental to
Singapores economy because we have a significant bulk of SMEs here. This will
undermine all the efforts that the government is putting in to help these SMEs all
these years.
Whoever the losers is, the tax is expected to lead to some degrees of market
inefficiency due to the reduced competition, since neither tobacco nor liquor industry
is a natural monopoly or oligopoly.
17
4.2 REDUCTION IN TOTAL SURPLUS
Smaller firms, with little bargaining power with their suppliers, are expected to
pass on the tax burden partially, if not entirely, to consumers. And thus, this results
in reduced total surplus, as well as dead weight loss. In fact, most coffee shops in
Singapore have already started charging higher beer prices since the announcement
of the tax (Chow, 2014), undoubtedly causing customer disutility (Aripin, 2014).
4.3 THE CIGARETTE BLACK MARKET
With higher taxes, smokers seeking alternatives will turn to the black market for
more affordable options. In fact, higher sin taxes are often associated with a booming
cigarettes black market (Hartnett, 2014). In 2013, Singapore Customs seized 2.9
million packets of cigarettes; almost double that in 2012 and 1 million more in the
previous year (Yeo, 2014). In light of rising cigarette prices triggered by sin taxes,
more smokers would be driven to the black market; therefore cigarette smuggling is
expected to increase.
TABLE 4.1: ESTIMATION OF CIGARETTE CONFISCATION
Year 2011 2012 2013 2014*
Number of cigarettes seized (in millions) 1.9 1.4 2.9 2.0
*Figures for 2014 are estimated.
We use a conservative estimate in predicting cigarette smuggling for 2014. By
using the average of the previous years, we estimate Singapore Customs can seize
2.0 million packets in 2014, as shown in Table 4.1. Implications on society include
tax revenue that went unpaid and manpower resources to clamp down on such
18
smuggling. The estimated evaded tax in 2014 will be valued using figures from the
latest cigarette hauls from 2013.
In late 2013, the authority conducted the second largest contraband cigarettes
haul and confiscated a total of 17600 cartons and 8 packets, with a total value of
$1.6million and total duty and tax evasion of over $1.3million (Sim, 2013). These
figures are used as a proxy for potential tax duties evaded in 2014 based on the
estimated 2 million packets Singapore Customs can expect to seize.
TABLE 4.2: TAX RELATED TO CIGARETTE SMUGGLING
2nd largest haul in 2013 2014*
Number of cigarettes seized (in packets)
(17,600 x 10) + 8 = 176,008
2,000,000 x 1% = 20,000**
Total Tax evaded $1,300,000 $7.38 x 20,000 = $147,600
Tax/Packet $1,300,000 / 176,008 = $7.38
$7.38
*Figures for 2014 are estimated. ** Assuming 10% increase in tax causes 1% increase in black market trading volume.
Table 4.2 summarized the estimated tax revenue forgone as a result of increased
cigarette smuggling. We assume that the 10% increase in tobacco tax leads to 1% in
crease in the illegal trading. The rise in the black market trading volume is likely to
cost $147,600 a year in tax revenue that could have gone towards nation-building
instead. Other than the forgone revenue, increased cigarette smuggling will require
higher enforcement costs to clamp down on smugglers and more importantly, the rise
of organized crime in Singapore.
19
4.4 INCOME DISPARITY
Assuming smoking and excessive drinking activities are the only differences
that separate these consumers from the rest of the consumers, heavy smokers and
drinkers are significantly penalized through these increases in vice taxes which will
in turn use up an even bigger portion of their income in order to sustain this habit.
This may result in an income disparity between consumers that smoke or/and drink,
and consumers that do not.
According to the Adam Smith Institute, the average smoker spends 1,660 a
year on cigarettes, which is 20% of the income of the bottom 10%. The effects of
rising cigarette prices usually do spill over to the smokers families, especially low-
income earners, thereby putting unnecessary financial stress and burden on them
(Venkatesh, 2013). While the figures may not be that of Singapores, it is intuitive
that such habits actually take up a significant portion of income of the lower-income
group in the country, and sometimes even the working class. With the increase in
excise duties, the income gap will thus continue to widen.
20
SECTION 5:
SOCIAL BENEFIT
This section covers the social benefits generated by the tax hike on both goods.
5.1 ADDITIONAL TAX REVENUE
The biggest benefit of an increase in tax is the additional tax revenue generated.
The rise in liquor duties is expected to yield another S$120 million a year, while the
tax increase in tobacco is to result in an estimated S$70 million. Therefore, the tax
hike is expected to lead to additional revenue, totaling approximately S$200 million,
for the government.
As mentioned earlier and shown in the Table 5.1 below, the incremental in
alcohol price due to the tax hike depends on both the volume and alcohol percentage
of each beverage. This means that a small can of Anchor beer is able to cause an
increase in price by $0.19. This demonstrates the severity of this tax; making its
point that tax revenue is bound to increase tremendously.
TABLE 5.1: IMPACT OF ALCOHOL TAX ON PRICES
Source: Ministry of Finance, ST Graphics
21
5.2 DETERRENCE OF NEW ENTRANTS
We acknowledged that there are different demand functions for goods such as
alcohol and cigarettes, due to different levels of addiction.
For heavy smokers and drinkers, the demand for alcohol and cigarettes is
inelastic (Collis, Czubek, & Johal, 2010). This is due largely to the addictive nature
of both consumer goods. In this case, when the demand for a good is inelastic, tax
on these goods would mean that the costs are highly likely to be passed on to
consumers, as sellers know that an increase in price does not stop most of the
buyers. This leads to a successful transfer of burden from producers to consumers.
Consumers, thus, are the ones who face rising prices.
When prices are increased, demand for the good, theoretically, falls. However,
due to the price inelastic nature of the good, an increase in tax may not force
consumers to quit. This is especially true for heavy users, who are addicted to either
cigarettes or alcohol. It is difficult to reduce the overall number of drinkers and
smokers.
Instead, a high sin tax is more likely to deter new entrants. This means that
ideally, a sin tax will reduce the growth rate of new smokers and drinkers. It may
even force moderate and mild users out of the market. This is depicted in a study
conducted by Grossman, 1989, where it is proven that the use of alcohol by youths
is inversely related to the prices of alcoholic beverages (Michael & Grossman,
1989).
22
5.3 SAVING ON PRODUCTIVITY LOSS
In 2013, the first comprehensive report was done to investigate costs of
smoking at the workplace in the United States (Berman, Crane, Seiber, & Munur,
2013)
TABLE 5.2: COST OF SMOKING INCURRED BY EMPLOYERS
United States (USD)* Singapore (SGD)**
Smoking Breaks $3,077 $3,077 x 1.25 = $3,846.25
Health Insurance $2,055 -nil-
Absenteeism $517 $517 x 1.25 = $646.25
Total estimated costs ~$5,816 ~$ 4,492.50
* Figures for United States are referenced from the report Tobacco Control. ** Figures for Singapore are estimated costs based on current exchange rate USD1=SGD1.25
Table 5.2 shows that it is more expensive to hire smokers since they incur costs
in the form of smoke breaks, health insurance and absenteeism. There is no
comprehensive study that calculates the cost of smoking to employers in Singapore.
However, one can use the associated figures from Tobacco Control as a proxy to the
Singapore context.
Healthcare insurance is usually not directly provided by companies in
Singapore. Instead, companies can opt to contribute to their employees Medisave
accounts, at a pre-determined rate, for both smoking and no-smoking employees.
Therefore there are no healthcare insurance costs in Singapore context. Assuming
smokers from both countries take similar smoking breaks and absenteeism from
work, each Singaporean smoker will cost their bosses an estimated $4,492 more
than their non-smoking coworkers.
23
With the tax hike, smoking at the workplace will be reduced. We assume equal
proportions of both types of smokers since there are no official statistics available.
As per earlier analysis, the social smokers will cut out smoking completely due to
higher prices but the regular smoker will not. The benefit of the tax is thus savings
of $4,492 / 2 = $2,256 per smoking employee to the average firm.
5.4 FEWER EXTERNALITIES
Tobacco products and alcoholic beverages are deemed as demerit goods,
because of the negative externalities generated. Negative externalities occur when
third parties, who are not involved in the production and consumption of the good,
incur external costs and are not compensated.
With fewer drinkers and smokers, it would lead to a fall in negative externalities
on the whole. These could include lower crime rate, fewer road accidents, lesser
vandalism and even an overall drop in disruptions in society.
5.4.1 FEWER TRAFFIC ACCIDENTS
Research has indicated that higher alcohol taxes affect not only alcohol
consumption but also various alcohol-related problems as well. One example would
be traffic fatalities.
There have been numerous studies investigating the relationship of alcohol
taxes and traffic fatalities. With U.S. data from 1982 to 1988, a study has confirmed
findings that a higher alcohol tax is associated with lower rates of traffic fatalities.
(Ruhm, 1996) This means that higher alcohol taxes are indirectly linked to lower
24
traffic fatality rates. They found that for every 1% increase in the price of beer, the
traffic fatality rates fell by the same proportion.
TABLE 5.3 ROAD ACCIDENT CASUALTIES AND CASUALTY RATES
Source: Singapore Police Force, 2012
The table above shows that Singapores road accident rates for a 10-year period
have been steadily decreasing. For a conservative estimate, we take the average of
the 10-year period and arrive at 2.33 casualties per 10,000 vehicles. After taking into
account the 25 % increase in alcohol tax, the eventual retail price for beer increased
by 24%. When coupled with results that a 1% increase in price of beer causes a
corresponding fall in traffic fatalities, then the traffic fatality rate is calculated to fall
to 1.77/10,000 vehicles. Thus the benefit of this tax is the additional 0.55 lives
gained from lesser traffic fatalities. We use the same measure for the value of one
life ($1.45million), arriving at the equivalent of $0.79 million.
25
5.4.2 LESSER AIR POLLUTION
Air pollution that caused by smoking is known as Environmental Tobacco
Smoke (ETS), which is actually the smoke from other people's cigarettes.
Secondhand smoke is the combination of smoke from the burning end of a cigarette
and the smoke breathed out by smokers. Secondhand smoke contains more than
7,000 chemicals. Hundreds are toxic and about 70 can cause cancer.
According to Pope (2002), an elevation of 10 mg/m3 of long-term exposure to
fine particle air pollution (particulate matter (PM2.5)), including that from tobacco
smoke, is associated with 6%, 9% and 14% increased risk for all cause,
cardiopulmonary and lung cancer mortality respectively.
With lesser smoking, emission of PM2.5 into the air will be lesser.
5.5 REDUCTION OF EMOTION DISTRESS
When a family member falls sick, it is human nature that the whole family gets
emotionally affected. Such a spillover phenomenon becomes a social cost when the
family members of those who are suffering the consequences of smoking and
excessive drinking become upset, depressed or absent-minded. The health condition
of one person in a family could have a multiplier effect that decreases other
members productivity and physical wellbeing, of which the extent and value is
beyond the scope of this paper.
26
6. CONCLUSION
As is with the case of other government policies, the increase in excise duties
on tobacco and alcoholic products introduced in Budget 2014 has various costs and
benefits incurred by targeted individuals and the society as a whole.
For individual smokers, the 10% tax increase will raise the cost of lighting up
each cigarette, especially among addicted smokers whose demand curves are
inelastic; therefore resulting in loss of consumer surplus and disutility. Non-addicted
smokers are predicted to consume fewer tobacco products at the cost of foregone
enjoyment. As the non-addicted adjust their consumption pattern, it is possible that
they bear the cost of fewer smoking-related social opportunities. On the other hand,
both types of smokers enjoy the personal savings on cigarette consumption and
ensuing reduction in health risks in the long term, where demand curves are
relatively elastic.
For individual drinkers, they can obtain less consumer satisfaction since less
liquor can be bought given the same budget. With its most pronounced effect on
excessive drinking, the liquor tax forces binge drinkers to give up some, however
minor, personal satisfaction associated with the social perception of being able to
drink. In terms of cost, first and foremost, it should not be neglected that the tax
could discourage normal and healthy consumption of alcohol, resulting in foregone
health benefits, such as lower risk of cardiovascular diseases. Besides, for those
drinkers on track to developing alcohol use disorder, the tax increase deters the
development of an addiction and brings them many benefits, including reduced
health risks, saving on consumption, and preservation of working ability. Moreover,
27
for who have yet developed a habit out of drinking but are indeed consuming
alcohol excessively, the benefit is mainly realized in health benefits.
From a social perspective, the increase in sin tax could substantially reduce
the profit margin of small and medium enterprises that rely on the sales of cigarettes
and alcohol, as the enterprises are unable to shift the major part of the tax burden to
consumers. Therefore, companies that are more flexible in absorbing the tax could
tap on this opportunity to drive out their competitors, resulting in market
inefficiency. Besides, both tax increases, to some extent, cause decrease in supplier
surplus and give rise to deadweight losses. Moreover, the tax on tobacco, to be
specific, is expected to add to the prevalence of black market trading, therefore
leading to tax evasion. There is also law enforcement cost incurred by the
government to regulate against tobacco smuggling. Furthermore, the increases in
excise duties drive a wedge between the already wide income gap between those
who consume cigarettes and alcohol and those who dont.
In terms of social benefits, the tax change is expected to add an additional 200
million to the governments budget, which would be presumably well spent to
improve the society. Secondly, the rising costs reduce the prevalence of smoking
and drinking. Since many new entrants are likely to place substantial value on the
social benefits of these demerit goods, fewer smoking buddies and drinking
buddies are expected to deter new entrants through negative multiplier effect.
Thirdly, for companies who hire smokers that cut down smoking due to the sin tax
policy, the time wasted and productivity lost is saved. Last but no least, fewer
externalities, including road accidents, air pollution, and emotional distress, will be
curbed to a certain extent thanks to the policy.
28
Despite the indicative calculations and estimations in this paper, it is
recommended one that aims to evaluate the costs and benefits of such tax increases
should conduct more robust data collection and quantitative analyses. Nonetheless,
this paper has dedicated its effort in providing a preliminary and comprehensive
cost-benefit analysis of the issue at hand.
29
APPENDIX:
INDIVIDUAL CONTRIBUTIONS
** Due to final restructuring of contents and editing, the individual sections of
the report no longer exactly coordinates with what is initially stated below in this
appendix.
Liang Tian:
Explored the costs and benefits to individual smokers. Identified the different
types of smokers and drafted the demand curves that they face, and thus the slightly
differentiating costs that they face, from their respective perspective. And then
discussed the benefits to be enjoyed by smokers as a result of this tax hike.
Jensen:
Researched and examined the individual perspectives of a drinker, and
categorizing them clearly for better understanding. Analyzing the costs and benefits
faced by them as a result of the tax rise, which stretches beyond what conventional
economic theories can predict.
Soo Yue:
Reviewed different articles to gain a comprehensive scope of the impacts of a
vice tax increase on society, and applying it into Singapores context. She discussed
mainly on the social costs incurred from the tax increase of tobacco and liquor. And
used economic theories to explain certain inclinations of the economy.
30
Jamie:
Her focus area is on the social benefits of this recent sin tax hike. With several
references to different sources, examples were given to back up discussions. Taking
on the macroeconomic perspective, she listed the improvements to be enjoyed in
Singapore if the sin tax rise is to be effective.
Li Ting:
She compiled and edited the works of the above four members to ensure the
coherence within and across the different sections, to avoid any contradictions or
overlaps. Makes sure that each part is communicated effectively, which adds to the
overall soundness of the analysis of this paper.
Alan Dai Sheng
He edited the paper for the final round; verified key arguments and reasoning
presented; and made necessary changes, such as adding in novel content,
restructuring contents, and substantiating argument. He also wrote the Introduction
and Conclusion to give readers a clear direction and summary of the paper. On top
of that, he works on the cover, content and bibliography pages, and produce the final
presentation of our term paper.
31
BIBLIOGRAPHY
Collis, J., Czubek, M., & Johal, S. (2010). Estimating Price Elasticities of Demand for
Alcohol and Tobacco in the UK.
Ruhm, C. (1996). Are Recessions Good for Your Health?
Chaloupka, F., Grossman, M., & Saffer, H. (2002). The Effects of Price on Alcohol
Consumption and Alcohol-related Problems.
Gallet, C. (2007). The Demand for Alcohol: A Meta-analysis of Elasticities.
Michael, & Grossman. (1989). Health Benefits of Increase in Alcohol and Cigarette Tax.
Ministry of Finance. (2014, 03 14). Budget Measures. Retrieved 04 10, 2014, from Budget
2014 Singapore:
http://www.singaporebudget.gov.sg/budget_2014/BudgetMeasures.aspx
Berman, M., Crane, R., Seiber, E., & Munur, M. (2013). Estimating the cost of a smoking
employee. Tobacco Control .
Chow, J. (2014, 03 01). Beer prices rise by $1.30 at Kopitiam outlets. Retrieved 04 16, 2014,
from The Straits Times: http://www.straitstimes.com/breaking-
news/singapore/story/beer-prices-rise-130-kopitiam-outlets-20140301
Aripin, N. A. (2014, 03 14). Singapore drinkers complain about jacked-up beer prices.
Retrieved 04 16, 2014, from Yahoo News Singapore:
https://sg.news.yahoo.com/singapore-drinkers-complain-about-jacked-up-beer-
prices-172509722.html
Grossman, M. C. (1998). An empirical analysis of alcohol addiction: results from
monitoring the future panels. Economic Inquiry , 36 (1), 39.
Sim, W. (2013, 12 6). More than 17,600 cartons of contraband cigarettes seized in year's
second-largest haul. Retrieved 04 16, 2014, from The Straits Times:
http://www.straitstimes.com/breaking-news/singapore/story/more-17600-cartons-
contraband-cigarettes-seized-years-second-largest-h
Venkatesh, N. (2013). Impact of smoking: Influence on the society and global business.
International Journal of Business and Management Invention , 2 (3), 46-53.
32
Hartnett, K. (2014, 2 2). Bostons black-market cigarette problem. Retrieved 4 16, 2014,
from The Boston Globe: http://www.bostonglobe.com/ideas/2014/02/02/boston-
black-market-cigarette-problem/mJpfuuFZXXYxrBiEgTcyJM/story.html
Yeo, J. S. (2014, 01 23). 2.9 million packets of contraband cigarettes seized by Singapore
Customs last year - See more at: http://www.straitstimes.com/breaking-
news/singapore/story/29-million-packets-contraband-cigarettes-seized-singapore-
customs-last#sthash.E3rxNxg2.dpuf. Retrieved 4 16, 2014, from The Straits Times:
http://www.straitstimes.com/breaking-news/singapore/story/29-million-packets-
contraband-cigarettes-seized-singapore-customs-last
Chang, R. (2014, 02 21). Singapore Budget 2014: Duties on alcohol, tobacco and gambling
to rise. Retrieved 04 16, 2014, from The Straits Times:
http://www.straitstimes.com/breaking-news/money/story/budget-2014-duties-
alcohol-tobacco-and-gambling-rise-20140221
Channel News Asia. (2014, 02 21). Budget 2014: Taxation on liquor, tobacco products,
betting to increase. Retrieved 04 16, 2014, from Channel News Asia:
http://www.channelnewsasia.com/news/singapore/budget-2014-taxation-
on/1007940.html
Ministry of Finance. (2014, 02 21). Budget Speech . Retrieved 04 16, 2014, from Budget
2014 Singapore: http://www.singaporebudget.gov.sg/budget_2014/pe.aspx
Department of Statistics, Singapore. (2013). Yearbook of Statistics Singapore, 2013.
Singapore: Department of Statistics.
World Health Organisation. (2011). Singapore: Socioeconomic Context. Retrieved 04 16,
2014, from World Health Organisation:
http://www.who.int/substance_abuse/publications/global_alcohol_report/profiles/sg
p.pdf
Abraham, T. (2012, 11 24). Smoking: Tougher measures needed. Retrieved 04 16, 2014,
from The Straits Times: http://www.straitstimes.com/premium/forum-
letters/story/smoking-tougher-measures-needed-20121124
Ministry of Health. (2012). Singapore Mental Health Survey. Singapore: Ministry of Health.
OECD. (2013). OECD Health Working Paper. Paris: Organisation of Economic Co-
operation and Development.
33
Quah, E., Wai-Mun, C., & Ying, S. H. (2009). What is human life worth? In C. Wai-Mun,
& S. H. Ying, Singapore and Asia: Impact of Global Financial Tsunami and other
Economics Issues (pp. 173-184). Singapore: World Science Publishing Co. Pte. Ltd.
Harvard School of Public Health. (2014). Alcohol: Balancing risks and benefits. Retrieved
04 16, 2014, from Harvard School of Public Health:
http://www.hsph.harvard.edu/nutritionsource/alcohol-full-
story/#possible_health_benefits
The Indian Express. (2012, 01 12). Why drinking makes you feel so good? Retrieved 04 16,
2012, from The Indian Express: http://archive.indianexpress.com/news/why-
drinking-makes-you-feel-so-good/898943/1
Szalavitz, M. (2012, 08 20). Why College Binge Drinkers Are Happier, Have High Status.
Retrieved 04 16, 2014, from Time Magazine:
http://healthland.time.com/2012/08/20/why-college-binge-drinkers-are-happier-
have-high-status/